A minimum-wage hike isn’t the answer to stagnating take-home pay

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Higher minimum wages set by government instead of the free market limit job opportunities for workers in need of them most and harm the economy as a whole.

It has been said that doing what sounds good often gets in the way of doing what works. There is perhaps no better example of this than State Rep. Tom Anzelc’s well-intentioned attempt to raise Minnesota’s minimum wage via constitutional amendment, a proposal he floated last Wednesday.

Andy Brehm

Anzelc is right to be deeply concerned about the fact that Minnesotans’ real median household incomes are dropping, income inequality is growing and that there is too little opportunity for those in our state struggling in this anemic economic recovery. But his medicine – arbitrarily raising wages by government fiat – would only make the malady worse.

Contrary to prevailing DFL demagoguery, opposition to minimum-wage laws is not grounded in the desire to see the rich richer and the poor poorer. It stems from a basic, common-sense understanding that higher minimum wages set by government instead of the free market limit job opportunities for workers in need of them most and harm the economy as a whole.

Someone has to pay for it

Politicians too often forget what every economist understands: Increasing the minimum wage and therefore the cost of labor is not a free lunch; someone has to pay for it. Some assume employers simply absorb government-imposed increased labor costs in the form of lower profits. But this is not an option for most small businesses and industries that operate in a world of razor-thin margins. What decades of economic research shows is that their bottom lines demand that they react by cutting hiring, reducing work hours and benefits and, if possible, raising prices — all of which hurt Minnesota workers and its economy.

Analyzing nearly five decades of research on the minimum wage, the congressional Joint Economic Committee in 1995 released a study finding, in addition to less employment, some additional consequences of minimum wage laws: longer unemployment for low-paid workers; greater turnover; fewer fringe benefits and greater incentives for labor saving electronic and mechanical devices.

A higher minimum wage is not only a bad idea because of the lost wages it would cause due to the elimination of lower paying positions, but, perhaps even more important, because of the loss of vital on-the-job training that would otherwise come with them. Minimum-wage jobs are critical, usually short-term vehicles for less skilled workers to enter into the work force and acquire basic skills from which to build upon and advance. That’s why two out of every three minimum-wage earners are making more within a year of minimum-wage employment.

How much does it help?

And raising the minimum wage may not be the powerful poverty-fighting weapon many think it is. The study “Will a $9.50 Federal Minimum Wage Really Help the Working Poor?,” conducted three years ago, found that a federal minimum-wage increase to $9.50 per hour would raise incomes of only 11 percent of workers living in poor households.

In North Dakota, the minimum wage is $7.25 an hour, much less than the Minnesota minimum Mr. Anzelc would like. And yet in some parts of the Rough Rider state, fast-food employees are making $15 an hour because of the area’s surging economy.

There is no question that the take-home pay of hardworking Minnesotans is stagnating. But a minimum-wage hike is not the answer; policies to jumpstart Minnesota’s economy – lower taxes, less regulation and smaller government — are.

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Comments (21)

We could also raise employment by getting rid of workplace safety laws, sanitary standards, child labor laws, and mandatory time off. Every economist understands that. But not every economist thinks it should be done.

Every society has to balance the efficiency of the free market with the kind of equity that only government can provide. It’s true that someone has to pay for the minimum wage, but that’s not necessarily a bad thing.

“Every society has to balance the efficiency of the free market with the kind of equity that only government can provide.”

Government isn’t providing anything but interference in an otherwise free society. Richard Nixon notwithstanding, it’s not the role of government to set wages or prices. Regardless of the constitutionality of the idea, there isn’t a bureaucrat or politician smart enough to out-think the marketplace because more often than not, neither has ever worked in said marketplace.

Mr Brehm’s reasoning would seem to advocate the elimination of all minimum-wage laws, and I believe we’ve seen how that works out. People don’t pay higher wages out of the kindness of their hearts (well, except for Costco’s excellent business model). If they can get people desperate enough to work for $1.50 an hour that’s what they’ll pay them.

“The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (“wage compression”); and small price increases.

Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers.”

And from one of the studies it discusses:

‘Doucouliagos and Stanley (2009) put the size of the effects they find into perspective: “A 10 per cent increase in the minimum wage reduces employment by about 0.10 per cent… But even if this adverse employment effect were true, it would be of no practical relevance. An elasticity of 0.01 has no meaningful policy implications.’

You’d never get a hint of any of this responsible research if your were listening solely to Mr. Brehm, who sings a party line.

The last paragraph of the opinion piece says it all. If Minnesota were more like the Republican stronghold of North Dakota, we’d be set! So if we had a smaller government, with fewer regulations, a desolate, uninviting landscape where no one wanted to live, but we discovered an enormous store of oil under our borders, we wouldn’t need a minimum wage hike.
Problem solved!

At $7.10 an hour a person isn’t going to be able to get by without receiving government help. That’s just the truth and nothing less. Supply Side dolts for one, don’t buy their own food. They don’t buy supplies for their households. Not toothpaste, not light bulbs, not bandaids…the list goes on and on. They don’t have to try ‘save’ for an emergency which will always come up. Or save for simple things like trying to find money for Christmas gifts. The wealthy just don’t have any concept of what doing something for themselves is like. It’s no wonder that they don’t see any problems that the poor must face. And by the way…wages will continue to drop for the middle class.

Mr. Brehm would do well to read “Nickle & Dimed,” about a lady who took low end jobs to see if she could earn enough in 30 days to make next month’s rent. One of the jobs she took was in a Minnesota Walmart and brother, it wasn’t pretty.

For those who don’t want to pick up the book, she found it nearly impossible to get ahead on a low wage job, such as waitressing and a cleaning service. Even with advantages from her middle class lifestyle, such as a car that’s paid for, she found it extremely difficult to get the cash together to make rent, especially after taking into account food and medicine. And that’s ignoring such items as first month’s rent on an apartment, damage deposit, application fee, and all those million-and-one items that suck the savings out of someone who’s already struggling to make a buck.

And then there are people like Mr. Brehm who try to tell people that being poor is actually good for them and good for the economy. Pip pip and cheerio, my good man! Just pull yourself up by your bootstraps as I have done. Why with just the right pair of riding breeches you can at least appear to be a member of the elite class!

Comparing Minnesota’s to North Dakota’s economy is a non-starter as the latter is going through an oil boom. ND is an outlier on the statistical chart and not a normal data point. Other posters here have pointed that out, but I have a feeling Mr. Brehm knew that before he even wrote the piece and deliberately decided to pursue the argument anyway.

That’s simply being intellectually dishonest.

The real issue we’re facing here is that American workers are much more efficient in their jobs than we were 20 or 40 years ago, meaning goods and services are being produced at a cheaper price. But the savings aren’t going to the workers, but exclusively to the business owners. The gains aren’t being shared equally. As a result we’re seeing the average wage of all workers (not just entry level) fall while the rich accumulate wealth at an ever increasing rate.

And raising the minimum wage will not harm the economy, as Mr. Brehm claims. Rather those wages will go to people who need it the most to buy food, clothing, medicine, and pay for an education so they can advance in life. It’s money well spent to help out our neighbors, thereby raising all boats instead of just the yachts of the wealthy.

It’s all so very simple, Andy wants us to believe. Simply get rid of government, at least up to a certain point, and economic miracles will occur. No doubt, cutting something here and there, streamlining some regulatory process, and simplifying tax code, etc., would have benefits.

But this is not what the Republicans like Andy are proposing, or what they believe. They believe, and have become nothing short of fundamentalist evangelists for, the evidence-free belief that government is almost always bad.

“Smaller government,” “less regulation”, “lower taxes” have become effective soundbites (for some anyway), but in reality they’re obnoxiously simple-minded solutions to problems that require more complex thinking and policy. Even uttering these phrases drops the public policy IQ by 30 points.

A recent editorial in Technology Review, a publication not at all hostile to business, noted that there is simply not enough incentive for business and venture capital to invest in long term basic research, the kind of research that may or may not pan out, but when it does, can have great significance. This is well known.

So, when Republicans like Andy trot out the tired liturgy of “lower taxes, less regulation and smaller government,” one must wonder if they read anything, even know anything, beyond the political talking points of their party.

The problem goes all the way to the top of the right-wing “intelligentsia,” where you can find right-wing “think tanks” like Cato and Heritage saying that the sequester really hasn’t done any harm at all.

Outside of the right-wing thought bubble, there’s a different reality–actually, the only reality that counts–not conservative clichés but evidence:

“Sequestration is a blunt and reckless tool that has chipped away at the core role our institutions play for the country in conducting critical research that leads to next-generation, technological breakthroughs. Even in its earliest phase, sequestration is permeating every aspect of the work that our research universities do,” said Peter McPherson, Assn. of Public and Land-grant Universities president.”

Nothing to see here, apparently, Andy and fellow conservatives. Keep applying the same mindless formulas to changing and complex problems.

The next time you hear “lower taxes, less regulation and smaller government,” know that while there might at times be a place for these remedies, they originate with people who aren’t paying attention to the mountains of evidence of when they don’t work. Why? They either don’t care, or simply don’t know any better. Their beliefs have become dogmas. Whatever the explanation, they have little incentive in their conservative echo chamber to even notice that something isn’t right with the half-baked gospel they’re preaching.

outpacing the U.S. in standard of living have higher taxes, more government regulation, higher minimum wages, and more social services.

When I was in Sweden two years ago, I attended services at the Anglican Church in Stockholm, which attracts English-speaking expatriates from all over the world.

One American I talked to told me that the social safety net in Sweden was so strong that there was little charitable work for the churches to do. Instead, they concentrated their efforts on the former Soviet Union (a short distance away), where the end of Communist government had actually made life worse for a lot of people, due to the dismantling of the social safety net.

Aside from the fact that the small government utopias of Somalia and Bangladesh don’t appear to be the economic boomers that Mr. Brehm would predict, There has always been a massive flaw in this Republican free market mumbo jumbo. The problem is simply that there is no such thing as a “free market”. Never has been, never will be. All economies redistribute wealth, and all governments redistribute wealth.

There is not nor could there ever be a “free” labor market. You either have government policies that favor employers, or labor, or strike some kind of balance. In any case the coercive force of government, whether it breaking strikes or lock-outs, is going to be an essential element.

What amazes me about guys like Brehm is they actually seem to think that no one has ever tried running a trickle down economy before. It’s kind of astounding that at this late date with all of our history behind us people like Brehm still believe in markets that are not only “free”, but magical as well.

By the way, an 11% raise is 11 times more than the working poor will get otherwise and far better than wage cuts and loss of buying power American workers have been experiencing over the last two decades.

We’ve already discussed the fact there is no such thing a “free” labor market, just markets that are skewed to various degrees one way or the other.

Our current labor market is skewed in favor of employers, now trickle down economics predicts that a employer skewed labor market will produce a more equitable economy. That prediction defies all historical experience of recent and distant past.

The best era for American workers was the post war period from 1948 to the late 60s. This era saw a huge growth in America’s middle class and general economic prosparity. It would be a mistake however to assume that the labor prosperity (i.e. higher wages) of that era was a function of lower government minimum wage requirements. In lieu of minimum wage requirement the US had very strong and active labor unions at the time, labor union participation was 50+%. That means fewer than 50% of american workers were at-will employees working under negotiated contracts at the time. Currently close to 90% of the American work force work are at-will employees. What we’ve seen throughout history is that in the absence of collective bargaining and labor contracts employers will race to the bottom as fast as is practicable in most circumstances.

It’s worth noting that these “free market” champions are ALSO rabidly anti-union which is why I keep referring to them as trickle-down champions. It’s disingenuous to argue that markets will raise wages when in fact Republican actually believe that low wage work environments are better for the economy. It’s also disingenuous to argue that free markets will produce the best wages for workers when you actively pursue a policy of deliberate imbalance of power between employers and employees for decades. What kind of “freedom” are we producing in the work place when workers are systematically denied any opportunity to negotiate wages? For “whom” is this market “Free?”

Furthermore, a lot of us believe that businesses should pay their workers enough so that all the rest of us, taxpayers at numerous levels, don’t have to pay for essentials for those low-paid workers: food, health care at emergency rooms, housing subsidies, etc. Target and Walmart and other companies who grossly under pay their people actually have services to tell them how to get the government to help them live from day to day. Because their employer doesn’t pay them a decent wage.